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Payday loan rate cap under review as fears mount over extortionate lending

by: Joanna Faith
  • 29/11/2016
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The interest rate cap on payday loans and charges on unarranged overdrafts are to be reviewed by the Financial Conduct Authority (FCA).

In a call for inputs, launched today, the regulator wants feedback on its proposed review of the high cost credit market which will form part of a wider-ranging investigation.

The payday loan price cap came into force on 2 January 2015 after concerns about extortionate fees impacting vulnerable people.

Since the introduction of the cap, Citizens Advice said the number of people it has needed to help with payday loan problems has dropped by almost half.

The FCA said it will assess whether the payday loans cap should be changed and will consider if there is any evidence of consumers turning to illegal money lenders directly as a result of being excluded from taking out payday loans because the price cap has changed loan provider criteria.

The regulator is also looking for evidence on how the wider high cost credit market is working – including rent to own, guarantor and logbook loans – to find out how firms are treating their customers.

Citizens Advice chief executive, Gillian Guy, said: “Payday loan problems have fallen, but other high cost credit products are causing problems for thousands of borrowers.

“We’ve been helping people who have got into financial problems after taking out a rent to own agreement and logbook or guarantor loan where high interest rates and charges have made it difficult to pay back what they owe.”

A Citizens Advice report into the rent to own market, which allows consumers to purchase an appliance, for example, by renting it for a period of time before they own it, found specific problems within the industry. These included inadequate checks to make sure people can pay back what they borrow and poor treatment when payments are missed.

“By turning its attention to the wider high cost credit market, the FCA has an opportunity to build on the success of tackling the payday loan industry, by extending the price cap and introducing more protections for consumers,” said Guy.

Andrew Bailey, chief executive of the FCA, said: “We have come up to the point of reviewing the cap on payday lending, making now the right time to take a broader view of the issues around high-cost credit, including unarranged overdrafts, and to consider whether our requirements remain appropriate.”

Debt charities and consumer groups have been calling for the regulator to intervene and set a cap on unarranged overdraft fees in the same way it did with payday loans.

Charity Step Change estimates nearly 10,000 people each month go into an unarranged overdraft and Which? said charges can be as high as those on payday loans.

The deadline for submitting feedback is 15 February 2017.

 

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